Southwest Stock Will Soar as Other Airlines Remain Grounded

Over the past month or so, sentiment has turned sharply lower for the airlines. At first, they recovered following the March stock market crash. But the longer the pandemic drags on, the more apparent it has become that it will be a slow return to normal. Airline shares have, as a result, hit new lows. Southwest Airlines (NYSE:LUV), for example, recently broke the $30 mark and has slumped to $24 per share now. That’s the lowest LUV stock has been since 2014.

LUV Stock Will Soar as Other Airlines Remain Grounded
Source: Carlos E. Santa Maria / Shutterstock.com

In general, the market is probably right. Reopening the economy is not going to be a panacea for airlines whatsoever. With social distancing rules in effect and most business conferences and large social events canceled, the next 3-6 months will be painful ones for the aviation industry.

What’s less clear, however, is whether Southwest should be trading down so sharply. Admittedly, airlines as a group have good reason to keep falling.

I’d avoid the U.S. Global Jets ETF (NYSEARCA:JETS) for example. But Southwest, as the healthiest airline, has the ability to benefit directly from other airlines getting weaker.

How will that play out in practice? Let’s take a look at the international market to get a sense of the possibilities for Southwest going forward.

International Opportunities and LUV Stock

Southwest has the best balance sheet of the major U.S. carriers. That’s always a nice feature to have, and it takes on special importance now. It gives them the most flexibility to ride out this crisis. Let’s take the analysis a step further though: How can Southwest cash in on its superior position?

One obvious answer is that Southwest can seize lucrative international routes as rivals struggle. This may seem out of character for Southwest. The company long eschewed international flying, sticking instead to its bread and butter of offering the lowest-cost service around the continental United States.

You may recall it didn’t even add service to Hawaii until 2019. However, the purchase of AirTran in 2011 started to broaden Southwest’s horizons. And in 2014, the company took the plunge and started launching new routes into the Caribbean.

In 2016, the United States and Mexico finally loosened restrictions on routes between the two countries. This opened up the U.S.-Mexican market to unbridled competition, and Southwest has shown more interest in southward expansion.

It already serves four Mexican cities, including Cozumel, where it just started flying earlier this year. Southwest also has flights to Costa Rica, the Dominican Republic, and other touristy Latin American destinations.

Other Airlines Are Set to Shrink

So Southwest has already established a decent start to building out a Latin American network. And now it may have the chance to make a big leap forward in this regard. That’s because other airlines in the region have much flimsier balance sheets and may have to reduce operations sharply or face liquidation altogether.

Last week, for example, Colombia’s flagship carrier, Avianca (NYSE:AVH) filed for bankruptcy protection in New York after missing a bond payment. It was the second-largest carrier in Latin America prior to the coronavirus.

While it had its primary base in Bogota, it also had a major hub in El Salvador, and was one of the biggest carriers between the U.S. and Central America. Southwest could have the opportunity to muscle in on a lot of fast-growing routes in that region, and potentially add more routes into Colombia as well.

Additionally, Mexico has three discount carriers. While Volaris (NYSE:VLRS) appears to be financially sound, there are more questions about the other two, VivaAerobus and Interjet. Interjet, in particular, ran into huge problems with its decision to rely on Russian Sukhoi Superjets instead of using more popular aircraft from major manufacturers.

As a result, there had been rumors about Interjet’s health even prior to the coronavirus. Up until the crisis started, Interjet flew to nine different countries in the Americas, including flights to 10 different U.S. cities — a lot of territories that could be up for grabs soon.

With both Avianca and Interjet (or another Mexican carrier) potentially facing sharp cutbacks or even liquidation, Southwest has the chance to expand aggressively. Southwest’s superior balance sheet gives it the ability to play offense while others have to shrink their operations.

LUV Stock Verdict

This is a scary time to be invested in the airline sector. We’re going through the worst crisis for the airline companies in many years, and perhaps ever. As such, volatility and uncertainty are extreme. There’s a good case for avoiding the sector entirely.

However, if you do want to have an investment in the recovery of the airlines, Southwest is clearly the safest choice right now. Its stand-out balance sheet gives its a huge edge over rivals.

In turn, it can actually focus on expansion as soon as traffic figures start to pick back up. As other airlines slump, Southwest will have a golden opportunity to build out its international network and truly take its place as the country’s most profitable and trustworthy airline.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/luv-stock-will-soar-airlines-grounded/.

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